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CISG CASE PRESENTATION

China 12 February 1999 CIETAC Arbitration proceeding (Chrome plating production line equipment case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/990212c1.html]

Primary source(s) of information for case presentation: Case text

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Case identification

DATE OF DECISION: 19990212 (12 February 1999)

JURISDICTION: Arbitration ; China

TRIBUNAL: China International Economic & Trade Arbitration Commission [CIETAC] (PRC)

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1999/08

CASE NAME: Unavailable

CASE HISTORY: A CIETAC tribunal first rendered its arbitral award on 12 July 1996. The Second Respondent [Buyer] applied for setting-aside of the award before Beijing Municipal No. 2 Intermediate People's Court. On 24 October 1997, the court notified the CIETAC for the latter to re-arbitrate the case. Based on the notification from the court, on 29 October 1997 the CIETAC decided to re-arbitrate. On 12 February 1999, a new CIETAC tribunal rendered this arbitral award.

SELLER'S COUNTRY: Switzerland (Claimant)

BUYER'S COUNTRY: People's Republic of China (First Respondent), People's Republic of China (Second Respondent)

GOODS INVOLVED: Chrome plating production line equipment


UNCITRAL case abstract

PEOPLE'S REPUBLIC OF CHINA: China International Economic & Trade Arbitration
Commission (CIETAC) 12 February 1999 (Chrome plating production line equipment case)

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/98],
CLOUT abstract no. 980

Reproduced with permission of UNCITRAL

Abstract prepared by Jean Ho

This case concerned the non-performance of a contract by joint buyers and the remedies available to the seller. A subsidiary issue was whether an employee can bind his employer by signing a contract on behalf of the employer.

The Swiss seller and two Chinese buyers concluded a contract for the sale of one set of chrome plating production line equipment CIP (cost and insurance paid) Shanghai. A certain percentage of the purchase price was payable by Letter of Credit (L/C) against the bill of lading. Prior to delivery, the seller asked the buyers to open the L/C immediately. The second buyer informed the seller that there were problems with its bank and it would be able to open the L/C only later. The first buyer informed the seller that the end-user could not obtain credit from its bank to purchase the equipment from the buyers and that the seller should contact the [end-user] and the second buyer. Ultimately, neither the first nor the second buyer opened a L/C as stipulated in the contract. Since the end-user had gone bankrupt and the buyers were unable to perform their obligations under the contract, the seller resold the equipment to another company.

The seller claimed damages for the price difference resulted by the substitute transaction less the amount already paid by the first buyer, interest, storage expenses and various costs and expenses.

The second buyer disputed the liability, arguing that its employee who negotiated and signed the contract had no power to conclude contracts that were binding on the second buyer as well. Relying on past practices, the first buyer disagreed.

The arbitral tribunal rejected the second buyer's argument of non-liability since an employee of the second buyer is not a third party to the contract and was therefore fully capable of representing and binding the second buyer by its signing of the contract. The tribunal held that both buyers had fundamentally breached the contract by failing to open the L/C upon the seller's performance of the contract (article 25 CISG) and were, therefore, liable for the seller's claims for damages since all the losses incurred as a result of the breach ought to have been foreseen by the buyers at the time of conclusion of the contract (article 74 CISG). The tribunal further held that the buyers were liable for the seller's legal fees and the costs of the arbitration and rearbitration.

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Classification of issues present

APPLICATION OF CISG: Yes [Article 1(1)(a)]

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 74 ; 75 ; 78

Classification of issues using UNCITRAL classification code numbers:

25B [Definition of fundamental breach: substantial deprivation of expectation, etc.]

74A ; 74B [General rules for measuring damages: loss suffered as consequence of breach; Outer limits of damages: foreseeability of loss];

75C [Damages recoverable on avoidance: difference between contract price and price in substitute transaction];

78A [Interest on delay in receiving price or any other sum in arrears]

Descriptors: Fundamental breach ; Damages ; Foreseeability of damages ; Cover transactions ; Interest

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Editorial remarks

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Collection of Arbitral Awards of China International Economic and Trade Arbitration Commission (1963-2000), vol. _, pages 1548-1552.

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Dong WU, CIETAC's Practice on the CISG, at nn.108, 146, 157, Nordic Journal of Commercial Law (2/2005)

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Case text (English translation)

Reproduced with permission from Collection of Arbitral Awards of China International Economic and Trade Arbitration Commission (1963-2000), vol. _, pages 1548-1552.

China International Economic & Trade Arbitration Commission
CIETAC (PRC) Arbitration Award

Chrome plating production line equipment case (12 February 1999)

Translation [*] by LIU Ping [**]

Translation edited by Meihua Xu [***]

On 25 July 1992, Claimant, as seller (hereinafter: the "[Seller]"), and First Respondent and Second Respondent, as joint buyers (hereinafter: the "First Respondent [Buyer]", "Second Respondent [Buyer]" and "Respondent [Buyers]"), concluded a contract (hereinafter: the "Contract") for the former to sell one set of chrome plating production line equipment to the latter.

The contract price is CIP Shanghai (PRC) 272,930 Swiss francs [Sf].

An annex to the Contract stated that after the Contract came into effect the first installment in the amount of 10 percent of the contract price (i.e., 27,293 Sf) was due upon the bank guarantee provided by [Seller]; that [Seller] shall deliver the goods within 8 months after its receipt [of the first installment]; and that the remaining 90 percent of the contract price shall be paid by means of letter of credit - 80 percent of which shall be paid against the bill of lading and 10 percent of which shall be due upon the examination and acceptance report signed by the end-user.

After the conclusion of the Contract, [Seller] issued its bank guarantee on 22 September 1992.

On 15 October 1992, First Respondent [Buyer] remitted 10 percent of the contract price as advance payment to [Seller]. Thereafter, Respondent [Buyers]' failure to open the letter of credit in the amount of 90 percent of the contract price caused the Contract to become incapable of performance. Dispute arose and [Seller] submitted the case for arbitration.

POSITION OF THE PARTIES

[Seller]'s Claim

[Seller] finished all the goods under the Contract within the contractually specified time. Because Respondent [Buyers] did not open the letter of credit as required by the Contract, [Seller] could not take back a substantial amount of receivables, and had to bear interest due to its bank. Because [Seller] could not ship the goods on schedule [due to Respondent [Buyers]' breach], [Seller] had to rent a place to store the goods and pay for the storage fees. [Seller]'s losses were increasing. As a result, [Seller] makes the following requests:

1. Respondent [Buyers] should continue their contract performance;

2. Respondent [Buyers] should compensate [Seller] for its economic loss in the amount of 51,584 Sf;

3. Respondent [Buyers] should bear the arbitration fees and [Seller]'s attorney fees.

Because Respondent [Buyers]' end-user has been bankrupt and Respondent [Buyers] are not able to open the letter of credit and accept the goods under the contract [by themselves], [Seller] resold the chrome plating machine production-line to H Company on 13 March 1996, for the price of 77,785 Sf.

Based on the above circumstances, [Seller] amended its requests to arbitration in a supplemental opinion submitted to the Arbitral Tribunal on 22 October 1998. The amended requests are:

1. Respondent [Buyers] should compensate [Seller] for its losses caused by the price difference: 167,852 Sf, and interest of 176,551.60 Sf (calculated until November 1998 at the annual interest rate of 12.5%);

2. Respondent [Buyers] should compensate [Seller] for its storage losses 15,000 Sf, and interest 9,375 Sf;

3. Respondent [Buyers] should bear [Seller]'s legal fees US $15,000 (including attorney fees, investigation fees, and travel and hotel costs);

4. Respondent [Buyers] should to bear the costs for this re-arbitration.

Second Respondent [Buyer]'s Reply

1. Second Respondent [Buyer] is not a party to the Contract in dispute.

2. The person who signed the Contract with "** Shang Hai Office Xu **" is incapable of representing Second Respondent [Buyer]. Xu ** is only an ordinary employee at Second Respondent [Buyer]'s Shanghai office. Without authorization by the legal representative of Second Respondent [Buyer], Xu ** has no power to represent Second Respondent [Buyer] to sign any contract externally. Second Respondent [Buyer] has never had any knowledge of Xu **'s signing of the Contract, not to say admission of liability.

3. The Shanghai office of Second Respondent [Buyer] is not authorized to sign any contract externally. The act of Xu ** to conclude a contract externally in the name of "** Shang Hai office" is therefore invalid.

4. [Seller] and First Respondent [Buyer] knew the above circumstances, but still signed the Contract with Xu **. This makes the Contract legally ineffective with respect to Second Respondent [Buyer]. [Seller] and First Respondent [Buyer] should assume corresponding responsibilities.

5. The Contract is partially invalid. Neither the Shanghai office of Second Respondent [Buyer] nor Xu ** himself is a qualified party to conclude a foreign-related economic contract. Therefore, the act of signing ["** Shanghai Office Xu **"] is invalid, and the relevant part of the Contract should be invalid.

First Respondent [Buyer]'s Reply

1. Second Respondent [Buyer] is the main party to the Contract in dispute and therefore should be responsible for the Contract signed by its office externally. The process of pre-contract negotiation, conclusion and performance of the Contract and occurrence of this dispute shows clearly that Xu **, the person signing for Second Respondent [Buyer], has played a main role. Letters [between First Respondent [Buyer] and Second Respondent [Buyer]] show that other employees at Second Respondent [Buyer]'s Shanghai office have also participated in this matter. First Respondent [Buyer] and the Shanghai office of Second Respondent [Buyer] are long-term business partners. According to both parties' past cooperation practice, the statement that Xu **'s signing on the Contract is absolutely his/her personal activity is not in line with the facts.

2. First Respondent [Buyer] has always complied with the good faith principle. And this re-arbitration is not caused by First Respondent [Buyer]'s fault. Therefore, First Respondent [Buyer] should not bear costs in relation to [Seller]'s supplemental arbitration requests.

[Seller]'s Rebuttal

It is also [Seller]'s position that Second Respondent [Buyer] should bear civil liabilities under the Contract.

OPINION OF THE ARBITRAL TRIBUNAL

1. Applicable law

In the Contract, the parties make no agreement on the applicable law. The places of business of [Seller] and Respondent [Buyers] are in the People's Republic of China and Switzerland, respectively. Both countries are signatories to the United Nations Convention on Contract for the International Sale of Goods (hereinafter: the CISG), and accordingly this Arbitral Tribunal applies the CISG in this case.

2. Contract capacity of Second Respondent [Buyer]

This Arbitral Tribunal examines the Contract in dispute. In the place for the buyers to sign, there are "** Shanghai office Xu **", company name of First Respondent [Buyer], and signatory of an [authorized] representative of First Respondent [Buyer]. "**" is the abbreviation of Second Respondent [Buyer]'s English [company] name. Second Respondent [Buyer] alleges that Xu ** is not authorized [to sign the Contract], and its Shanghai office is not qualified to sign any contract externally. In this respect, this Arbitral Tribunal finds that Xu ** is an employee of Second Respondent [Buyer]'s Shanghai office, not any third party outside of Second Respondent [Buyer], and that Xu ** signed the Contract with First Respondent [Buyer] and [Seller] not in his/her individual name, but as a representative of Second Respondent [Buyer] or its Shanghai office. Whether an employee who signs a contract externally in the name of his/her company has been authorized by the company is a matter of Second Respondent [Buyer]'s internal management. Second Respondent [Buyer] cannot use this point against the other contractual parties. Meanwhile, whether Second Respondent [Buyer]'s Shanghai office is qualified to sign a contract externally has no influence on the binding effect of the Contract -- which is signed by Xu ** on behalf of Second Respondent [Buyer] -- on Second Respondent [Buyer]. Therefore, this Arbitral Tribunal holds that Second Respondent [Buyer] signed the Contract as the buyer.

According to written evidence before this Arbitral Tribunal, Second Respondent [Buyer] not only participated in the conclusion of the Contract, but also took part in and knew the performance process of the Contract:

On 1 March 1993, Second Respondent [Buyer] sent a fax to [Seller], notifying [Seller] that "[W]e could not open L/C on February 1993. ... So we can open L/C before the end of March. ...We are very sorry for the delay of opening L/C. "

On 21 June 1994, Second Respondent [Buyer] and First Respondent [Buyer] concluded an agreement with the [Seller] to arbitrate disputes in relation to the Contract.

To sum up, this Arbitral Tribunal holds that Second Respondent [Buyer] and First Respondent [Buyer] are joint buyers under the Contract, and the Contract is binding on Second Respondent [Buyer], [Seller] and First Respondent [Buyer].

3. Contract performance

As found by this Arbitral Tribunal, [Seller] submitted the bank guarantee on 22 September 1992. First Respondent [Buyer] wired 10 percent of the contract price, as the advance payment, to [Seller] on 15 October 1992. In February 1993, [Seller] completed all goods under the Contract, and notified First Respondent [Buyer] and Second Respondent [Buyer] via [Seller]'s Hong Kong company that the letter of credit should be opened immediately. On 1 March 1993, Second Respondent [Buyer] faxed to [Seller], stating that due to reasons caused by its bank, it could not open the letter of credit in February 1993, but that it could open it by the end of March 1993. On 28 June 1993, First Respondent [Buyer] informed [Seller] by a fax that the end-user had not obtained credits from its bank, and that for any problem [Seller] should contact the end-user and Second Respondent [Buyer]. However, ultimately neither First Respondent [Buyer] nor Second Respondent [Buyer] opened the letter of credit. And this caused the Contract to become incapable of continuing performance.

Since no party disputes the above facts, this Arbitral Tribunal recognizes these facts.

4. Liability for breach

Based on the above facts, this Arbitral Tribunal holds that the failure of First Respondent [Buyer] and Second Respondent [Buyer], as joint buyers, to open the letter of credit as provided by the Contract, constitutes a fundamental breach of contract, and Respondent [Buyers] should be liable for their breach.

5. [Seller]'s losses and arbitration requests

After [Seller] learned that the end-user of Respondent [Buyers] had become bankrupt and that Respondent [Buyers] were not able to open the letter of credit and accept the goods, [Seller] resold the goods to H Company on 13 March 1996, at the price of 77,785 Sf. The loss suffered by [Seller], i.e., the price difference, is the contract price (272,930 Sf) minus the 10 percent advance payment (27,293 Sf) and then minus the resale price (77,785 Sf) - that is, 167,852 Sf. According to Articles 74 and 75 of the CISG, such losses of [Seller] should be compensated by Respondent [Buyers]. Under Article 78 of the CISG, Respondent [Buyers] should compensate [Seller] for its loss of interest caused by Respondent [Buyers]' breach. In its amended arbitration requests, [Seller] demands that the interest be calculated until November 1998 and that the annual interest rate be 12.5%. This Arbitral Tribunal upholds this request of [Seller], and holds that the loss of interest should be 176,551.60 Sf.

In addition, Respondent [Buyers]' fundamental breach caused [Seller]'s loss of storage fees 15,000 Sf and loss of interest 9,375 Sf. [Seller] submits evidence to prove those losses, and this Arbitral Tribunal supports [Seller]'s request for storage fees and interest.

[Seller] submits evidence regarding the attorney fees, investigation fees, and travel and hotel costs. After examination, this Arbitral Tribunal recognizes [Seller's request for the relevant losses].

According to Article 74 of the CISG, this Arbitral Tribunal holds that all of [Seller]'s losses are possible losses that Respondent [Buyers] foresaw or ought to have foreseen at the time of the conclusion of the Contract. Respondent [Buyers] should be liable for all those losses.

Because the current dispute is caused by Respondent [Buyers]' breach, Respondent [Buyers] should bear the costs of arbitration and re-arbitration.

To sum up, this Arbitral Tribunal upholds all of [Seller]'s arbitration requests, as amended.

THE ARBITRAL AWARD

1. First Respondent [Buyer] and Second Respondent [Buyer] shall compensate [Seller] for its losses caused by the price difference in the amount of 167,852 Sf, and interest in the amount of 176,551.60 Sf;

2. First Respondent [Buyer] and Second Respondent [Buyer] shall compensate [Seller] for its storage losses 15,000 Sf and interest 9,375 Sf;

3. First Respondent [Buyer] and Second Respondent [Buyer] shall bear [Seller]'s attorney fees and other costs in the amount of US $15,000;

4. First Respondent [Buyer] and Second Respondent [Buyer] shall bear the costs for both the first arbitration and this re-arbitration which has been paid by [Seller] in advance.

5. First Respondent [Buyer] and Second Respondent [Buyer] shall pay the above amount within 30 days after this award takes effect.

This is the final award.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of Switzerland is referred to as [Seller] and the Respondents of the People's Republic of China are referred to as First Respondent [Buyer] and Second Respondent [Buyer], and jointly as Respondent [Buyers]. Amounts in the currency of Switzerland (Swiss francs) are indicated as [Sf]; and amounts in the currency of the United States (dollars) are indicated as [US $].

** LIU Ping, Lawyer, Baker & McKenzie, Beijing, People's Republic of China; LL.M., Harvard Law School, 2003-2004; Master of Civil and Commercial Law, Tsinghua University Law School, 2000-2003.

*** Meihua Xu, LL.M. University of Pittsburgh School of Law on an Alcoa Scholarship. She received her Bachelor of Law degree, with the receipt of Scholarship granted by the Ministry of Education, Japan, from Waseda University, Tokyo, Japan. Her focus is on International Business Law and International Business related case study.

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Pace Law School Institute of International Commercial Law - Last updated October 20, 2010
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